The Best-Laid Incentive Plans

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Hiram Phillips finished tying his bow tie and glanced in the mirror. Frowning, he tugged on the left side, then caught sight of his watch in the mirror. Time to get going. Moments later, he was down the stairs, whistling cheerfully and heading toward the coffeemaker.

“You’re in a good mood,” his wife said, looking up from the newspaper and smiling. “What’s that tune? ‘Accentuate the Positive’?”

“Well done!” Hiram called out. “You know, I do believe you’re picking up some pop culture in spite of yourself.” It was a running joke with them. She was a classically trained cellist and on the board of the local symphony. He was the one with the Sinatra and Bing Crosby albums and the taste for standards. “You’re getting better at naming that tune.”

“Or else you’re getting better at whistling.” She looked over her reading glasses and met his eye. They let a beat pass before they said in unison: “Naaah.” Then, with a wink, Hiram shrugged on his trench coat, grabbed his travel mug, and went out the door.

Fat and Happy

It was true. Hiram Phillips, CFO and chief administrative officer of Rainbarrel Products, a diversified consumer-durables manufacturer, was in a particularly good mood. He was heading into a breakfast meeting that would bring nothing but good news. Sally Hamilton and Frank Ormondy from Felding & Company would no doubt already be at the office when he arrived and would have with them the all-important numbers—the statistics that would demonstrate the positive results of the performance management system he’d put in place a year ago. Hiram had already seen many of the figures in bits and pieces. He’d retained the consultants to establish baselines on the metrics he wanted to watch and had seen various interim reports from them since. But today’s meeting would be the impressive summation capping off a year’s worth of effort. Merging into the congestion of Route 45, he thought about the upbeat presentation he would spend the rest of the morning preparing for tomorrow’s meeting of the corporate executive council.

It was obvious enough what his introduction should be. He would start at the beginning—or, anyway, his own beginning at Rainbarrel Products a year ago. At the time, the company had just come off a couple of awful quarters. It wasn’t alone. The sudden slowdown in consumer spending, after a decade-long boom, had taken the whole industry by surprise. But what had quickly become clear was that Rainbarrel was adjusting to the new reality far less rapidly than its biggest competitors.

Keith Randall, CEO of Rainbarrel, was known for being an inspiring leader who focused on innovation. Even outside the industry, he had a name as a marketing visionary. But over the course of the ten-year economic boom, he had allowed his organization to become a little lax.

Take corporate budgeting. Hiram still smiled when he recalled his first day of interviews with Rainbarrel’s executives. It immediately became obvious that the place had no budget integrity whatsoever. One unit head had said outright, “Look, none of us fights very hard at budget time, because after three or four months, nobody looks at the budget anyway.” Barely concealing his shock, Hiram asked how that could be; what did they look at, then? The answer was that they operated according to one simple rule: “If it’s a good idea, we say yes to it. If it’s a bad idea, we say no.”

“And what happens,” Hiram had pressed, “when you run out of money halfway through the year?” The fellow rubbed his chin and took a moment to think before answering. “I guess we’ve always run out of good ideas before we’ve run out of money.” Unbelievable!

“Fat and happy” was how Hiram characterized Rainbarrel in a conversation with the head-hunter who had recruited him. Of course, he wouldn’t use those words in the CEC meeting. That would sound too disparaging. In fact, he’d quickly fallen in love with Rainbarrel and the opportunities it presented. Here was a company that had the potential for greatness but that was held back by a lack of discipline. It was like a racehorse that had the potential to be a Secretariat but lacked a structured training regimen. Or a Ferrari engine that needed the touch of an expert mechanic to get it back in trim. In other words, the only thing Rainbarrel was missing was what someone like Hiram Phillips could bring to the table. The allure was irresistible; this was the assignment that would define his career. And now, a year later, he was ready to declare a turnaround.

Lean and Mean

Sure enough, as Hiram steered toward the entrance to the parking garage, he saw Sally and Frank in a visitor parking space, pulling their bulky file bags out of the trunk of Sally’s sedan. He caught up to them at the security checkpoint in the lobby and took a heavy satchel from Sally’s hand.

Moments later, they were at a conference table, each of them poring over a copy of the consultants’ spiral-bound report. “This is great,” Hiram said. “I can hand this out just as it is. But what I want to do while you’re here is to really nail down what the highlights are. I have the floor for 40 minutes, but I guess I’d better leave ten for questions. There’s no way I can plow through all of this.”

“If I were you,” Sally advised, “I would lead off with the best numbers. I mean, none of them are bad. You hit practically every target. But some of these, where you even exceeded the stretch goal . . .”

Hiram glanced at the line Sally was underscoring with her fingernail. It was an impressive achievement: a reduction in labor costs. This had been one of the first moves he’d made, and he’d tried to do it gently. He came up with the idea of identifying the bottom quartile of performers throughout the company and offering them fairly generous buyout packages. But when that hadn’t attracted enough takers, he’d gone the surer route. He imposed an across-the-board headcount reduction of 10% on all the units. In that round, the affected people were given no financial assistance beyond the normal severance.

“It made a big difference,” he nodded. “But it wasn’t exactly the world’s most popular move.” Hiram was well aware that a certain segment of the Rainbarrel workforce currently referred to him as “Fire ’em.” He pointed to another number on the spreadsheet. “Now, that one tells a happier story: lower costs as a result of higher productivity.”

“And better customer service to boot,” Frank chimed in. They were talking about the transformation of Rainbarrel’s call center—where phone representatives took orders and handled questions and complaints from both trade and retail customers. The spreadsheet indicated a dramatic uptick in productivity: The number of calls each service rep was handling per day had gone up 50%. A year earlier, reps were spending up to six minutes per call, whereas now the average was less than four minutes. “I guess you decided to go for that new automated switching system?” Frank asked.

“No!” Hiram answered. “That’s the beauty of it. We got that improvement without any capital investment. You know what we did? We just announced the new targets, let everyone know we were going to monitor them, and put the names of the worst offenders on a great big ‘wall of shame’ right outside the cafeteria. Never underestimate the power of peer pressure!”

Sally, meanwhile, was already circling another banner achievement: an increase in on-time shipments. “You should talk about this, given that it’s something that wasn’t even being watched before you came.”

It was true. As much as Rainbarrel liked to emphasize customer service in its values and mission statement, no reliable metric had been in place to track it. And getting a metric in place hadn’t been as straightforward as it might seem—people haggled about what constituted “on time” and even what constituted “shipped.” Finally, Hiram had put his foot down and insisted on the most objective of measures. On time meant when the goods were promised to ship. And nothing was counted as shipped till it left company property. Period. “And once again,” Hiram announced, “not a dollar of capital expenditure. I simply let people know that, from now on, if they made commitments and didn’t keep them, we’d have their number.”

“Seems to have done the trick,” Sally observed. “The percentage of goods shipped by promise date has gone up steadily for the last six months. It’s now at 92%.”

Scanning the report, Hiram noticed another huge percentage gain, but he couldn’t recall what the acronym stood for. “What’s this? Looks like a good one: a 50% cost reduction?”

Sally studied the item. “Oh, that. It’s pretty small change, actually. Remember we separated out the commissions on sales to employees?” It came back to Hiram immediately. Rainbarrel had a policy that allowed current and retired employees to buy products at a substantial discount. But the salespeople who served them earned commissions based on the full retail value, not the actual price paid. So, in effect, employee purchases were jacking up the commission expenses. Hiram had created a new policy in which the commission reflected the actual purchase price. On its own, the change didn’t amount to a lot, but it reminded Hiram of a larger point he wanted to make in his presentation: the importance of straightforward rules—and rewards—in driving superior performance.

“I know you guys don’t have impact data for me, but I’m definitely going to talk about the changes to commission structure and sales incentives. There’s no question they must be making a difference.”

“Right,” Sally nodded. “A classic case of ‘keep it simple,’ isn’t it?” She turned to Frank to explain. “The old way they calculated commissions was by using this really complicated formula that factored in, I can’t remember, at least five different things.”

“Including sales, I hope?” Frank smirked.

“I’m still not sure!” Hiram answered. “No, seriously, sales were the most important single variable, but they also mixed in all kinds of targets around mentoring, prospecting new clients, even keeping the account information current. It was all way too subjective, and salespeople were getting very mixed signals. I just clarified the message so they don’t have to wonder what they’re getting paid for. Same with the sales contests. It’s simple now: If you sell the most product in a given quarter, you win.”

With Sally and Frank nodding enthusiastically, Hiram again looked down at the report. Row after row of numbers attested to Rainbarrel’s improved performance. It wouldn’t be easy to choose the rest of the highlights, but what a problem to have! He invited the consultants to weigh in again and leaned back to bask in the superlatives. And his smile grew wider.

Cause for Concern

The next morning, a well-rested Hiram Phillips strode into the building, flashed his ID badge at Charlie, the guard, and joined the throng in the lobby. In the crowd waiting for the elevator, he recognized two young women from Rainbarrel, lattes in hand and headphones around their necks. One was grimacing melodramatically as she turned to her friend. “I’m so dreading getting to my desk,” she said. “Right when I was leaving last night, an e-mail showed up from the buyer at Sullivan. I just know it’s going to be some big, hairy problem to sort out. I couldn’t bring myself to open it, with the day I’d had. But I’m going to be sweating it today trying to respond by five o’clock. I can’t rack up any more late responses, or my bonus is seriously history.”

Her friend had slung her backpack onto the floor and was rooting through it, barely listening. But she glanced up to set her friend straight in the most casual way. “No, see, all they check is whether you responded to an e-mail within 24 hours of opening it. So that’s the key. Just don’t open it. You know, till you’ve got time to deal with it.”

Then a belltone announced the arrival of the elevator, and they were gone.

More Cause for Concern

An hour later, Keith Randall was calling to order the quarterly meeting of the corporate executive council. First, he said, the group would hear the results of the annual employee survey, courtesy of human resources VP Lew Hart. Next would come a demonstration by the chief marketing officer of a practice the CEO hoped to incorporate into all future meetings. It was a “quick market intelligence,” or QMI, scan, engaging a few of Rainbarrel’s valued customers in a prearranged—but not predigested—conference call, to collect raw data on customer service concerns and ideas. “And finally,” Keith concluded, “Hiram’s going to give us some very good news about cost reductions and operating efficiencies, all due to the changes he’s designed and implemented this past year.”

Hiram nodded to acknowledge the compliment. He heard little of the next ten minutes’ proceedings, thinking instead about how he should phrase certain points for maximum effect. Lew Hart had lost him in the first moments of his presentation on the “people survey” by beginning with an overview of “purpose, methodology, and historical trends.” Deadly.

It was the phrase “mindlessly counting patents” that finally turned Hiram’s attention back to his colleague. Lew, it seemed, was now into the “findings” section of his remarks. Hiram pieced together that he was reporting on an unprecedented level of negativity in the responses from Rainbarrel’s R&D department and was quoting the complaints people had scribbled on their surveys. “Another one put it this way,” Lew said. “We’re now highly focused on who’s getting the most patents, who’s getting the most copyrights, who’s submitting the most grant proposals, etc. But are we more creative? It’s not that simple.”

“You know,” Rainbarrel’s chief counsel noted, “I have thought lately that we’re filing for a lot of patents for products that will never be commercially viable.”

“But the thing that’s really got these guys frustrated seems to be their ‘Innovation X’ project,” Lew continued. “They’re all saying it’s the best thing since sliced bread, a generational leap on the product line, but they’re getting no uptake.”

Eyes in the room turned to the products division president, who promptly threw up his hands. “What can I say, gang? We never expected that breakthrough to happen in this fiscal year. It’s not in the budget to bring it to market.”

Lew Hart silenced the rising voices, reminding the group he had more findings to share. Unfortunately, it didn’t get much better. Both current and retired employees were complaining about being treated poorly by sales personnel when they sought to place orders or obtain information about company products. There was a lot of residual unhappiness about the layoffs, and not simply because those who remained had more work to do. Some people had noted that, because the reduction was based on headcount, not costs, managers had tended to fire low-level people, crippling the company without saving much money. And because the reduction was across the board, the highest performing departments had been forced to lay off some of the company’s best employees. Others had heard about inequities in the severance deals: “As far as I can tell, we gave our lowest performers a better package than our good ones,” he quoted one employee as saying.

And then there was a chorus of complaints from the sales organization. “No role models.” “No mentoring.” “No chance to pick the veterans’ brains.” “No knowledge sharing about accounts.” More than ever, salespeople were dissatisfied with their territories and clamoring for the more affluent, high-volume districts. “It didn’t help that all the sales-contest winners this year were from places like Scarsdale, Shaker Heights, and Beverly Hills,” a salesperson was quoted as saying. Lew concluded with a promise to look further into the apparent decline in morale to determine whether it was an aberration.

The Ugly Truth

But if the group thought the mood would improve in the meeting’s next segment—the QMI chat with the folks at longtime customer Brenton Brothers—they soon found out otherwise. Booming out of the speakerphone in the middle of the table came the Southern-tinged voices of Billy Brenton and three of his employees representing various parts of his organization.

“What’s up with your shipping department?” Billy called out. “My people are telling me it’s taking forever to get the stock replenished.”

Hiram sat up straight, then leaned toward the speakerphone. “Excuse me, Mr. Brenton. This is Hiram Phillips—I don’t believe we’ve met. But are you saying we are not shipping by our promise date?”

A cough—or was it a guffaw?—came back across the wire. “Well, son. Let me tell you about that. First of all, what y’all promise is not always what we are saying we require—and what we believe we deserve. Annie, isn’t that right?”

“Yes, Mr. Brenton,” said the buyer. “In some cases, I’ve been told to take a late date or otherwise forgo the purchase. That becomes the promise date, I guess, but it’s not the date I asked for.”

“And second,” Billy continued, “I can’t figure out how you fellas define ‘shipped.’ We were told last Tuesday an order had been shipped, and come to find out, the stuff was sitting on a railroad siding across the street from your plant.”

“That’s an important order for us,” another Brenton voice piped up. “I sent an e-mail to try to sort it out, but I haven’t heard back about it.”

Hiram winced, recalling the conversation in the lobby that morning. The voice persisted: “I thought that might be the better way to contact your service people these days? They always seem in such an all-fired hurry to get off the phone when I call. Sometimes it takes two or three calls to get something squared away.”

The call didn’t end there—a few more shortcomings were discussed. Then Keith Randall, to his credit, pulled the conversation onto more positive ground by reaffirming the great regard Rainbarrel had for Brenton Brothers and the mutual value of that enduring relationship. Promises were made and hearty thanks extended for the frank feedback. Meanwhile, Hiram felt the eyes of his colleagues on him. Finally, the call ended and the CEO announced that he, for one, needed a break before the last agenda item.

Dazed and Confused

Hiram considered following his boss out of the room and asking him to table the whole discussion of the new metrics and incentives. The climate was suddenly bad for the news he had looked forward to sharing. But he knew that delaying the discussion would be weak and wrong. After all, he had plenty of evidence to show he was on the right track. The problems the group had just been hearing about were side effects, but surely they didn’t outweigh the cure.

He moved to the side table and poured a glass of ice water, then leaned against the wall to collect his thoughts. Perhaps he should reframe his opening comments in light of the employee and customer feedback. As he considered how he might do so, Keith Randall appeared at his side.

“Looks like we have our work cut out for us, eh Hiram?” he said quietly—and charitably enough. “Some of those metrics taking hold, um, a little too strongly?” Hiram started to object but saw the seriousness in his boss’s eyes.

He lifted the stack of reports Felding & Company had prepared for him and turned to the conference table. “Well, I guess that’s something for the group to talk about.”

Should Rainbarrel revisit its approach to performance management?

Stephen P. Kaufman recently retired as chairman of the board of Arrow Electronics, a company he served as CEO for 14 years. He is a senior lecturer at Harvard Business School in Boston.

If Rainbarrel were within a month of bankruptcy and in the hands of a turnaround manager, the kinds of changes Hiram has imposed wouldn’t be so unusual and might even be considered reasonable. But as far as I can tell, Rainbarrel just needs to tighten its belt in a period of cyclically soft sales and more aggressive competition. The case portrays Rainbarrel Products as a basically healthy and successful company.

But I’d bet that we as readers are seeing only half the trouble Hiram has caused. Given the pressure to ship faster, the warehouse is probably making more errors and thus adding to the number of returns and customer complaints. Now that every department has cut its staff, the company is probably hiring more expensive temps, consultants, and outsourcing firms. And let’s not even speculate on what the impact of a “wall of shame” might be. That’s the kind of humiliating tactic that could turn a devoted employee into a saboteur.

These troubles should be enough to teach Rainbarrel the first rule of performance management: You get what you pay for. If the warehouse workers are praised for putting a box over an imaginary line, they will put it there even if it’s not ready. If you pay the sales force only for sales dollars, you might end up with more sales, but at bad prices or with too many extra services promised. I remember a time at Arrow Electronics when we decided to pay out a part of the sales reps’ commissions at the time they took the customers’ orders. The result was that we got orders that never shipped—or that were shipped and later returned for full credit. One veteran salesman explained it this way, and I’ve heard the phrase many times since: “Look, you make the rules, we’ll play the game.”

Before top management starts introducing new rules, then, it had better have a good sense of the kinds of games these rules may promote. Hiram is blindsided by the discovery that his customer service people have learned not to open problematic e-mails. I made a similar mistake years ago by requiring Arrow warehouses to ship all orders received by 4 pm the same day. Since the orders were routed by our computer to a printer in the warehouse, the key to 100% same-day shipping performance was obvious: They pulled the plug on the printer at three o’clock.

All of this suggests another truism about performance management: The devil is in the details. It’s very difficult to define the right metric and anticipate exactly how your people will react to it. Your best chance of knowing whether it will have the intended effect is to talk to the people directly involved as well as their immediate supervisors. It’s very telling that Hiram is seen meeting with only his henchmen. He needs to go to the cafeteria, get a tray, and sit with the people who are doing the work at Rain-barrel. If he were my new chief financial officer, I’d have told him, “Staple yourself to the back of a warehouse manager for a week. Take the time to follow a general manager around his division. Ride along with some salespeople. Spend several months getting to know this company really well before you settle into your staff job.” Hiram knows nothing about Rainbarrel’s industry and how it works and knows little or nothing about the culture of the company. He must understand both in order to know what kind and what pace of change are appropriate in this situation.

It’s very difficult to define the right metric and anticipate exactly how your people will react to it. Your best chance of knowing whether it will have the intended effect is to talk to the people directly involved.

That point brings me to a big question about the Rainbarrel case. Where has the CEO been? Keith Randall has seriously abdicated his responsibilities as chief executive in giving a newly hired CFO such free rein—and across such a broad range of functions, many of them typically not a CFO’s job. When I was a young man, my father told me, “Good judgment comes from experience. But unfortunately, experience comes from bad judgment.” A manager’s career is all about building a base of good judgment on the back of mistakes. Hiram, if he’s at all reflective, will learn a lesson here. But his boss should have known it by now.

Steven E. Gross leads the U.S. compensation consulting practice of Mercer Human Resource Consulting. Based in Philadelphia, he is a frequent author and speaker on reward issues.

The good news in this case is that we see a senior management team that is focusing on performance measures as a way of creating more accountability for results. The bad news is that the team is using the wrong measures, and it has gone about establishing them in the wrong way. As a result, it is sacrificing long-term business success for short-term operational gains. What Rainbarrel needs are performance metrics that are less employee focused and more customer focused. But even these kinds of externally focused measures are likely to be ineffective unless management can successfully help workers understand and accept them.

The only reasonable way to embark on any performance management effort is to define the criteria for success, and that’s a step Hiram seems to have skipped. What’s the ultimate goal? Sales? Profits? Retained business? Lacking that big picture, Hiram is focusing on intermediary steps and assuming that such enhancements will produce a positive impact on the bottom line. Measuring the number of calls being handled by the call center is a good example. That’s a customer service measure but not an indicator of customer satisfaction. “Did one call solve the customer’s problem?” might be a better question for them to ask. Employee turnover is another metric that might make sense, given that employee tenure is highly correlated to the quality of customer service in these kinds of jobs. Practically speaking, it’s always tricky to balance what can be measured objectively and internally, what customers really want, and what ultimately creates value for the organization.

If I were Hiram, I wouldn’t have made a single change until I’d asked two basic questions: “What do we want employees to do differently to support the business?” and “Why aren’t they already doing it?” The answers to the second question will yield the greatest insights. Is it that they don’t have the knowledge or skills? Or is it that they don’t have sufficient tools or infrastructure? Is it a question of motivation? And if it’s a question of motivation, do people need to be spurred to work harder or smarter? Many of Hiram’s metrics were based on the assumption that the organization wasn’t working hard enough, but that’s usually not the case in most companies. Overwhelmingly, I think, people want to do a good job. Has anyone asked the warehouse workers why some orders weren’t being delivered on time?

Many of Hiram’s metrics were based on the assumption that the organization wasn’t working hard enough, but that’s usually not the case in most companies.

There is no evidence that Hiram sought any input from employees on the design of his measures, and I suspect that his approach to rolling out the new program featured information versus communication and education. If he wanted buy-in from employees, he should have gone much further than simply telling them what their goals were, helping them instead to genuinely understand why those objectives mattered to the business and to shareholders. He should have launched his program as a pilot and made it clear to employees that it would be refined based on their experience and input.

Even better, at the outset, he could have explained the company’s goals and then let employees own the process of defining how the goals should be reached and how progress toward them should be measured. I remember a time I was advising a client who ran a mine in Wyoming. Management wanted to bring down costs and had placed incentives for savings on all the factors that influenced costs. The company found itself paying out bonuses, yet the profitability of the mine didn’t improve. We were asked to investigate, and since the quantitative results were inconclusive, we went to Wyoming for some qualitative feedback. We asked the workers, “Is there anything you’ve done in the past 12 months that you might not have done if not for the bonus plan?” There was: They had shut off some of the faucets to conserve water. The problem was, less water flow meant less throughput of the material they were extracting. So, yes, water conservation yielded a 12% improvement on that metric. But the ultimate outcome was that the operation made less money due to lower productivity.

This is a perfect example of how you become what you reward. By rewarding the wrong short-term performance, this company was missing the greater opportunity for long-term success.

Vice Admiral Diego E. Hernández (U.S. Navy, retired) is a management consultant in both the public and private sectors and serves on a number of corporate boards. He is based in Miami Lakes, Florida.

Let’s spend a moment assessing Hiram’s job performance over the past year. In that short period of time, he has managed to create a climate of uncertainty and self-preservation among employees by reducing the workforce in two poorly planned increments. He has eliminated workers without reducing the amount of work. He has established the wrong metrics for customer service, shipping, and R&D. He has arrested the development of the company’s next generation of salespeople. He has delayed the launch of a breakthrough product. He has publicly humiliated company employees. And he has succeeded in teaching Rainbarrel’s workers that the best use of their time and energy is in devising ways to game the system.

Yes, I would say that Hiram needs to rethink his approach.

But I would hasten to add that Rainbarrel’s problems don’t begin and end with the CFO and his performance metrics. He is clearly oblivious to what his actions have done to the company, but he is not the only one. The CEO, first and foremost, doesn’t seem to be paying attention to his people or his customers. The VP of human resources says he doesn’t know what to make of the apparent decline in morale. The products division president knew he had a product breakthrough that was not funded but did not raise the issue with the CEO. The chief counsel knew that many of the patents he was reviewing were not commercially viable. There is something fundamentally wrong in a company where executives do not communicate openly and continually with one another about the business—where they do not question questionable things. Is it any surprise that rank-and-file employees aren’t sufficiently focused on what is good for the company? Their leaders obviously aren’t.

Is it any surprise that rank-and-file employees aren’t sufficiently focused on what is good for the company? Their leaders obviously aren’t.

Effective performance management begins with clear two-way communications to ensure goals are understood and accepted. Even more, it requires multiple feedback channels for employees so that they can inform managers of any problem areas in their jobs. Senior managers cannot make good decisions without knowing the truth, and at Rainbarrel, they aren’t hearing it.

When it comes to improving individual performance, I would urge Rainbarrel’s management to look beyond pay for performance and make more effective use of intangible rewards. Public recognition, a letter of appreciation, or a word of praise can do a great deal to focus an individual’s attention on organizational targets. Such motivational tools are powerful yet terribly underused in business settings.

That bias comes from my naval experience, no doubt. Leaders in the U.S. armed services have no control over compensation levels and don’t have the option of giving bonuses to high performers. We’re intensely focused on mission achievement and realize that’s entirely dependent on everyone buying in and giving it everything they’ve got—but the pay scales are set by Congress. How do we motivate people? We set high goals and communicate them simply and repeatedly. We take pains to establish valid metrics. We provide the means for people to achieve those goals, and we help remove the obstacles that always arise. In order to do that, we listen to people’s concerns and make use of multiple feedback loops so we can hear the truth. We create interim goals and publicly recognize interim successes. We differentiate, with an aim to promoting the top performers and getting rid of underperformers. And we do all this continuously. In the end, our people identify strongly with the goals of the organization and feel energized when they achieve these goals. And I can testify that there is nothing more electrifying to a leader than obtaining that level of commitment.

Right now, Rainbarrel’s management is witnessing the opposite condition. Employees are thoroughly alienated, for good reason, and they will have to reconnect with the company before anything good can happen. Management’s immediate focus should be to create the conditions that will allow employees to achieve Rainbarrel’s goals and to find ways to acknowledge and reward those achievements. Metrics are important, but the key to high performance is within people.

Barry Leskin was the chief learning officer for ChevronTexaco, the human resources partner at Ernst & Young, UK, and the chairman of the management and organization department at the University of Southern California’s Marshall School of Business. He is now an independent consultant.

Unfortunately for Rainbarrel, it needs to spend some time undoing the damage done by Hiram Phillips. As soon as possible, the CEO should focus on two change strategies for short-term and systemwide performance improvement: selecting performance-driven leaders and aligning the performance culture with the company’s strategic direction.

Research has demonstrated that a company’s top performers in mid- to senior-level jobs have a tremendous effect on corporate outcomes—that is, these top performers are 50% more productive than their average-performing counterparts. That means it’s imperative to identify and develop these significant contributors early on, ensure that they have the right skills, and then place them in high-level positions. Doing so may be one of the most effective ways to build and sustain a strong performance culture and, in turn, improve performance.

That said, creating a strong performance culture isn’t enough to change overall performance. A company must also align its performance and reward culture with its strategies. Indeed, a well-communicated strategy, with an integrated set of activities to support it, can itself signal to employees what senior executives really value, even if the leaders are advocating one set of behaviors and unintentionally rewarding another. But a company achieves its greatest advantage when performance culture and strategy reinforce each other and senior leaders consistently reward the activities they advocate.

A company achieves its greatest advantage when performance culture and strategy reinforce each other.

Selecting the right leaders and aligning culture with strategy, though critical to performance, are considered by some to be “soft” initiatives, and their importance may be underestimated by leaders who focus mainly on results. Such leaders are apt to continually seek engineering solutions to people issues—to no avail.

Hiram seems to fit this description. He has introduced performance metrics without thinking them through or consulting other business-unit heads about how these changes will affect the company. He has actually hurt performance. And Keith Randall isn’t any better. After all, he chose Hiram as a leader. What does this tell you about his understanding of how to lead organizational change? What signal has he sent to employees about his criteria for selecting senior leaders, and how does this affect his credibility?

During my career as a consultant and HR executive, I’ve seen many companies like Rainbarrel that unintentionally discourage employee behaviors that might increase corporate performance. For instance, top executives at one company tried to measure individuals’ performance and leadership skills by asking in a 360-degree survey “to what extent the leader provides consequences to those who commit to performance contracts and miss them.” The problem was, high scores on this item, meaning the leader was likely to provide consequences, had a low correlation with “effective leadership” in the survey. In other words, those who provided consequences were less likely to be seen as competent leaders by subordinates and peers. So ineffect, the company was signaling that it valued relationships and harmony over results.

Many companies also discourage behaviors like challenging the status quo and raising difficult issues, which are essential to corporate performance. When candidates who display these behaviors are up for high-level positions, they often lose out because they’re considered rebellious or in need of “polish.”

Just as illogical is the way that pay-for-performance plays out in most companies. The whole point of such schemes is to differentiate and improve individual performance. But since employees know their target bonus, and the bonus pools are zero-sum, it’s impossible for a manager to give one individual an outsize reward without penalizing one or more average performers, however slightly. Faced with this outcome, managers routinely default to the same target for everyone, fearful of demotivating the average performers. And that reluctance undermines all the power of performance-based pay, effectively punishing the high performers.

I could offer up more in this vein, but my point is simple. If Keith Randall selects the right leaders, communicates a clear set of goals, and aligns the company’s performance culture with its strategy, results will be achieved—slowly in the short term, perhaps, but exponentially faster over time.

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